Tag Archives: digital wallet

Unbank the banked

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Around the world there are hundreds of millions, billions of unbanked people. But why are so many people unbanked? It can’t be because there is a shortage of banks as there are more banks, challenger banks, neo-banks and near-banks than you can shake a stick at. There must be some other problem and, as the old saying goes, where there is a problem there is an opportunity. It’s a pretty big opportunity, too. The Economist summarises the situation in America as follows: access to banks can be costly and seven million households are unbanked, relying on cheque-cashing firms, pawn shops and payday lenders.

So what should be done? Let’s start by talking about the people who want a bank account but can’t get one because they lack the necessary identification documentation or perhaps other skills needed to function in that mode (eg, literacy). These are the true unbanked. As Wired magazine pointed out, basic bank accounts (which are mandated by the UK government) are accessible to those with poor credit histories, while niche banks including Revolut and Monzo do not usually ask potential customers for proof of address in order to open an account. So it seems reasonable to ask why almost two million British adults still do not have a bank account, never mind adults in emerging markets!

Maybe it’s because banks don’t provide anything useful for them. Think about the large numbers of people who are banked (but also use the products and services provided by fintechs, such as myself) and the people who are underbanked: the people who have a bank account but don’t really want it and don’t use the services offered because the bank account is an 18th-century product designed for a bygone age. Professor Lisa Servon wrote “The Unbanking of America” about this a few years ago, based on her experiences working in a check-cashing operation in New York (I cannot recommend this book highly enough), and the bank experience hasn’t changed much since then.

There’s a very interesting take on all of this in Charlotte Principato’s note on “How the Roughly One-Quarter of Underbanked U.S. Adults Differ From Fully Banked Individuals” over at Morning Consult. This goes into the demographic details of the fully banked, unbanked and underbanked U.S. population and is serious food for thought. In her survey, underbanked people were defined as having done at least one of three activities with a provider other than a bank or credit union in the past year: purchased a money order, paid bills or cashed a check. It is interesting to note that most (58%) of underbanked consumers say they could manage their finances just fine without a bank!

We have a situation, in fact, where some of the banked, most of the underbanked and all of the unbanked are turning to alternative providers because banks cannot or will not deliver the services that these customers want. Let’s together label these the “underserved”. I think the majority of adults are now underserved (prove me wrong!) and therefore continue represent an astonishing range of scale and scope opportunities for non-banks.

Serve The Underserved

Bank accounts are quite expensive things to run (as they should be, because banks should be heavily regulated). In some countries the banks are forced to offer a basic bank account to anybody who can jump the identification hurdle to get one. But a great many of these customers won’t be very profitable and it costs the banks a lot to serve them. Why continue to force banks to provide money-losing services to people who don’t want them anyway?

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with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

What the underserved need are not banks but new kinds of regulated financial institutions that deliver the modern services needed to support a 24/7 always-on economy. What are these services? As the economist John Kay noted in his recent paper on “A Robust and Resilient Finance” for the Korean Institute of Finance, while “many aspects of the modern financial system are designed to give an impression of overwhelming urgency… only its most boring part – the payments system – is an essential utility on whose continuous functioning the modern economy depends”.

In similar vein, in their new book “The Pay Off-How Changing the Way we Pay Changes Everything” Gottfriend Leibrandt (who was CEO of SWIFT from 2012 until 2019) and Natasha de Teran write that “while access to a banking system is seen as a crucial part of a country’s development and necessary for lifting people out of poverty, it is not as basic a need as the ability to pay”.

In other words, the fundamental need and the basis for inclusion in society is not a bank account or anything like it, but a safe and secure way to get paid and to pay for goods and services. And this is not a revelation! It seems to me that great many people would be well served by a simple digital wallet that might be provided by any of range of organisations from Facebook to Square. The goal of a modern and forward-looking strategy should be not to bank the unbanked but to unbank the banked.

(An edited version of this piece first appeared on Forbes, 11th September 2021.)

PayPal’s Bitcoin strategy is about much more than bitcoin

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Given that the people who are great supporters of bitcoin often talk about its key characteristic being that it is person-to-person, uncensorable value transfer you do have to wonder who will be using the new PayPal service that will allow them to pay merchants using the cryptocurrency. My good friend Ron Shevlin drew on a survey of 3,000 US consumers conducted by Cornerstone Advisors and FICO which found that around two-thirds of US smartphone users have the PayPal app installed (as I do), a seventh of all PayPal users already own some form of cryptocurrency and of those PayPal users, half of them used Bitcoin to buy products or services in the past year. So does this mean that the mass market use of cryptocurrency for payments is just around the corner?

I think not. The overwhelming majority of all cryptocurrency transactions are purely speculative and the people who think that bitcoin is a good investment* are never going to use it for payments. Bitcoin was originally billed as an elecronic cash system but most bitcoins aren’t used as currency in transactions for goods and services. Surveys have shown that the majority of bitcoin are held for speculative purposes and while some retailers accept Bitcoin, they see cryptocurrency purchases having a higher drop-out rate than cards and cash payments.

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with kind permission of TheOfficeMuse (CC-BY-ND 4.0)

So this can’t be much of a payments play. Think about it. If you think that the bitcoin is going to the moon (and will be worth $1 million each within five years, as this former Goldman Sachs hedge fund person has just predicted) then why would you waste even a tiny fraction of a bitcoin buying the pizza or a Pez dispenser? No, the people who will use their PayPal wallet to exchange bank dollars for PayPal bitcoin are simply investing. If they choose to pay a merchant using bitcoin from their wallet, PayPal gives the merchant dollars anyway. Neither the consumer nor the merchant ever has any actual bitcoins in their possession.

When people do use bitcoin to buy things it tends to be things they can't buy using PayPal anyway. Click To Tweet

The amount of cryptocurrency spent on “dark markets” rose two-thirds to reach a new high in the final quarter of 2019, according to Chainalysis and the New York Times says that this data is likely to understate the number transactions for illegal purposes because the company cannot identify all activities relating to drugs, ransomware, tax evasion and money laundering. If I use bitcoin to buy illegal drugs, example, because of its “anonymity” and uncensorability, then I am hardly likely to start buying drugs using PayPal. The example of adult services makes this point rather well. Adult performers who are engaged in a perfectly legal business complain that PayPal refuses to allow payments to them and so they are forced to use third-parties who, according to the New York Times, take anywhere from a third to four-fifths of performers earnings in fees. Those people still won’t be able to use PayPal, whether in dollar or bitcoin, so the new service won’t make any difference to them.

PayPal’s Big Picture

Well, since the people who run PayPal are much richer and much smarter than I am, I am forced to conclude that they must have a plan that goes beyond earning some spreads from buying and selling cryptocurrency for retail speculators. I have no knowledge what PayPal are doing or why, but I do have some experience looking at strategies for financial institutions exploiting new technology, so I think I can make some informed guesses.

First of all, PayPal’s move is to be admired purely in marketing terms. The announcement put five percent on their stock price and garnered gazillions of column inches, links and commentary such as this. Even if they never turn a profit on bitcoin itself, their investment in software and licences has already paid off. I worked on a project for a global financial services financial services organisation a couple of years ago and I can remember the calculations around brand and exposure. To old-timers like me, PayPal is the grandparent of fintech, an upstart storming the walls of the entrenched incumbent financial services giants. But to youngsters, such as the son who I just asked about the company, PayPal are part of the establishment, no different to Wells Fargo or Barclaycard. A bit of cryptocurrency glitter does not hurt the brand, even if it is cosmetic.

Secondly, the technologies of cryptocurrency (shared ledgers, cryptographic proofs and so on) are going to be the foundations of a longer term shift to the trading of digital bearer instruments that are exchanged without clearing or settlement networks so building up institutional expertise is valuable. It’s reasonable to imagine that these instruments might well be implemented as tokens traded across decentralised networks, so exploring the trade-offs around infrastructures and interfaces is a good investment of time and effort.

Thirdly, and much more importantly though, I suspect that PayPal are making two much more strategic and long-term plays around the wallet and its contents. They are no doubt looking enviously across the water to the Asian “super apps” and thinking about the impending Alipay IPO. Turning PayPal from being a repository of balances to fund payments into a financial hub managing a number of different assets for a broad range of consumers is attractive to them. In their scenario planning, PayPal undoubtably started to think about the opportunities that will arise from the trading and management of digital assets (in the form of tokens) in the not-too-distant future. By gaining expertise in decentralised alternatives to commercial bank money and the regulation that does with them, PayPal is being very smart.

I don’t think PayPal’s experiment with bitcoin is really much about bitcoin at all. I think this is a measured and intelligent step towards the transactional environments of the future where digital assets compete with digital fiat across a payments landscape that is utterly different to that of today. As Ajit Tripathi pointed out, crypto-believers might feel they have occupied Wall Street but the reverse is true. Banks (and their regulators) have won and some of these interesting new digital assets are on their way to becoming part of the financial mainstream.

There is one particular category of digital asset that is inevitable: Central Bank Digital Currency (CBDC). In the run-up to the biggest IPO in history, Jack Ma talked about how digital currencies may play an important role in building the type of a financial system that will be needed for the coming generation and said that digital currency could “create value and we should think about how to establish a new type of financial system through digital currency”. Just as the Chinese government have begun to distribute their digital currency through third parties, including commercial banks and apps, so PayPal might reasonably expect to be an invaluable partner to the US government when it finally gets its act together to deliver some sort of digital dollar. If PayPal were to pivot away from the traditional infrastructure of banks and accounts, payments cards and interchange towards an infrastructure of wallets exchanging digital dollars (or perhaps, as Meltem Demirors speculates from a very well-informed perspective, their own alternative to Facebook’s Libra private currency) that would be a significant shift in the dynamics of the payments sector.

* I am not saying that I do or do not think cryptocurrency is a good investment. I am not making any comments that might be misconstrued as financial advice. Please note that any comments I make about cryptocurrencies as an asset class are for entertainment purposes only.

[This is an edited version of a piece that first appeared on Forbes.com, 25th October 2020.]

Fed-PESA or Fed-Pal or Fed-Coin?

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I am not an expert on American politics and I’ve forgotten all the cartoons about how a bill becomes a law and that sort of thing, but I was absolutely fascinated to read in a draft the Democratic Party stimulus proposal for the United States (the ‘Take Responsibility for Workers and Families Act’’, all 1100 pages of which are here) about the use of electronic wallets to make direct stimulus payments. The proposal says that a “digital dollar wallet” shall mean a digital wallet or account, maintained by a Federal reserve bank on behalf of any person, that represents holdings in an electronic device or service that is used to store digital dollars that may be tied to a digital [identity] or physical identity” (my emphasis).

Wow. That’s a pretty interesting vision. None of the components exist, of course, and the digital dollar didn’t make it through to the final 1,400 page version of the proposal. It did, however, reappear in a bill from Senator Sherrod Brown (D-OH), ranking member of the Senate Committee on “Banking, Housing, and Urban Affairs” that again confuses what banks, bank accounts and bank money are by calling on the U.S. Government to

    1. Allow everyone to set up a digital dollar wallet, called a “FedAccount,” a free bank account that can be used to receive money, make payments, and take out cash.

      It wouldn’t really be like a typical bank account of course, it would be more like an M-PESA account because all users would have an account in the same centralised system. Since there are millions of Americans without bank accounts (not because there is a shortage of banks, by the way) but with smartphones, something like this is long over due.

    2. FedAccounts would be available at local banks and Post Offices.

      This must mean account opening would be available in these locations because they have the facilities for rudimentary identity verification. The U.S. has no digital identity infrastructure, so these have to be co-opted. With instant digital onboarding though, the vast majority of the population ought to be able to enroll on in a couple of minutes, download the Fed-PESA app and get to work. There should be instant downloading of the associated debit card to Apple Pay or Google Pay as well.

    3. FedAccounts would have no account fees or minimum balance requirements.

      You could, of course, simply tell commercial banks to provide this service as a public service and as a condition of holding a bank licence. The problem though is two-fold: the banks don’t want to provide such as service and people without bank accounts (for a variety of reasons) don’t want to use. But if the U.S. had electronic money regulations in place, then these accounts could be provided by Walmart or someone else who understands customer service.

    4. Account holders would receive debit cards, online account access, automatic bill-pay, mobile banking, and ATM access at Post Offices.

      All of which cost money, of course, and I’m not sure that debit interchange and interest foregone would be sufficient to pay for these accounts since most of them will be empty most of the time.

    5. FedAccounts can be used to make sure that everyone who is entitled to COVID-19-related relief receives it quickly and inexpensively. That means that people will not have to rely on costly check cashers or other alternative financial services.

      Nor will they need commercial banks (why would I keep an account at a commercial bank when I can get a free account from the government). What’s more, assuming that people can transfer money from one FedAccount to another as easily as people transfer money to each other by WeChat or M-PESA (with a vanishingly small marginal cost) then why wouldn’t merchants accept it?

That last point is, of course, the proximate cause of the interest in the Uncle Sam Account (USA, as I call it) and it did lead me to think that what if the corona crisis does indeed turn out to be a trigger for a digital dollar and universal digital wallets? I’m with Senator Brown in trying to find a 21st century solution at a time of national crisis. That would be amazing. But is this right architecture? Setting aside what might be meant by a “digital identity” for the moment, let us just focus on the digital dollar.

How would it work? Would people really have accounts with or devices from a central bank?

Fed-PESA or Fed-Pal or Fed-Coin?

There are obviously a number of different ways that the digital currency could be implemented by central bank as part of strategy to move to a cashless society (by which of course I’m in a society where cash is irrelevant not where it is illegal). Way back in the 1990s the model that was chosen for the Mondex experiment that began in the UK was to have the central bank control the creation of digital currency but have it distributed by the commercial banks through their existing channels

As I set out in my forthcoming book “The Currency Cold War“, this is only one of the ways of implementing a digital currency. The obvious, and potentially much cheaper, alternative is the Sherrod Brown plan: simply have the central bank create accounts for all citizens, businesses and other organisations. You could imagine something like amperes but on population scale, Bank of England pairs are if you like, in the UK example. This will be cheaper because it will be completely centralised and the marginal cost of transferring value from the control of one personal organisation to another through such a system would be absolutely negligible.

Central banks don’t really want to do this, however, because it would mean having to manage millions of accounts and they would prefer somebody else to do this and deal with everything else that goes with interacting with the general public. The commercial banks and plenty of other non-bank players (think Alipay in China for example) already have the apps, the infrastructure and the innovative approach that would not only bring the digital currency to the mass market but would also open up the potential for the digital currency as a platform for innovation and development.

This is what the Chinese refer to as the “two tier” approach (personally, I insist on calling it the Mondex approach) and I don’t doubt that it will be the approach adopted by commercial banks around the world where that time comes because the problems attendant on the disintermediation of the commercial banks are great. In the Bank of England’s March 2020 discussion paper on “Central Bank Digital Currency” (which is an excellent report by the way), they call this neither the two-tier nor the Mondex approach but the “platform approach” and quite rightly note that one of the key advantages of it is that it will help innovation throughout the “stack”.

Now imagine a merging of something like India’s UPI, M-PESA, social media and the “lifestyle apps” coming from the Far East and you can begin to develop a picture of just how powerful such an implementation might be in all markets. The Bank of England uses some specific terminology which I think makes sense and will allow for constructive discussions between regulators, businesses and innovators in the payments space. In the Bank of England’s platform model it is assumed that the central bank runs the platform (will come back to what the platform means in a moment) and provides what the Bank of England call “API access” to this platform. The people are allowed to access the platform are labelled Payment Interface Providers (“PIPs”) and it is these providers (banks among them course) who interact with users.

This seems to make a lot of sense to me. If anyone can pass on Mr. Brown’s address, I will cheerfully send the Senator a copy of my book hot from the press.

The Real Innovation

The Bank of England are clear that they do not envisage this platform as a cryptocurrency platform (although I can see reasons why this might be appropriate, the Libra-style architecture goes in this direction for example) but they do say that the technologies of a shared ledgers might be the best way to implement the reason it out in my book. Were such a system to come into existence its resilience and availability would become matters of vital national interest Therefore it will make complete sense to take advantage of the new technologies and construct a decentralised and robust solution. It’s quite easy to imagine what this might be. Each bank would have the option of maintaining its own or accessing somebody else’s, all banks above a certain size would be mandated to keep a copy of the ledger and the payment interface providers gateways would simply talk to each other (through the normal protocols of consensus chosen for the particular architecture) but there will be no central system in the middle that could either because of management failings princess usually the case), unforeseen technical problems or subversion by foreign powers.

The paper, which I urge you and Senator Brown to read, goes into a lot of detail about the design of such a viable national system and notes, as I do, that one of the most game changing aspects of such implementation would be what they call “programmable money”, what I called “smart money” in my previous book “Before Babylon, Beyond Bitcoin” and what a variety of ill-informed and misleading observers insist on referring to as “smart” “contracts” although they are in fact neither. This is where the real innovation will take place that will make the money of the future so very different from the money that we have now and I am very keen to see thinking develop in this area. There are obviously overheads associated with overloading the ledger with the distributed applications but on the other hand it may be that there are some truly revolutionary features that can only be delivered through such applications. The bank suggests a compromise whereby certain distributed applications are provided for the use of the PIPs in order to give them infrastructure that they can then use to develop innovative end-user services and this seems a good place to start.

All of which is by way of saying that Senator Brown’s proposal for a sort of Fed-PESA, while being well-intentioned, will tie a boat anchor to U.S. payments system. Far better to create smart money, money with an API, and unleash a next generation of creativity. Personally, I hope that the Bank of England decide to take the global lead in the race to create money for the digital future, rather than continue with digitised versions of money from the analogue past, and I for one would bet on them to succeed.